Blockchain Legal Analysis #1 – Analysis Of SEC DAO Report – By Attorney Greg Rigano

Attorney Greg Rigano focuses on blockchain & cryptocurrency based businesses. You can contact him at:

[email protected]

Tai Zen: What’s up everyone. This is Tai Zen. Today, we do not have Leon Fu Dotcom with us. If he decides to join us later, that would be awesome. But if not, that’s okay.

Today’s topic is outside his scope of expertise and outside of my scope of expertise because we’re cryptocurrency traders and investors, not professional lawyers or a licensed attorney.

A couple of weeks ago, SEC released an investigated report on the DAO tokens. I wanted to do some commentary on it, but I realized as I was reading through it, I didn’t understand half the stuff they were talking about.

Therefore, I reached out to Greg Rigano. He’s a corporate attorney who focuses on blockchain and cryptocurrency-based businesses. He helps them navigate the legal waters.

Let’s everyone welcome attorney Greg Rigano. Say hello to everyone, Greg

Attorney Greg Rigano: Thank you, Tai, for the wonderful intro. Hello everybody.

Tai Zen: I thought that it would rather be better to have you on to help us understand this report than I and Leon are trying to interpret and explain it to the public.

Greg is broadcasting from New York right now. I’m broadcasting from Atlanta, Georgia.

Greg is a former attorney at a huge law firm in New York called Chadbourne and Parke. Recently, they merge with an even bigger law firm called…

Attorney Greg Rigano: Norton Rose Fulbright. I’m still an attorney, not a former attorney.

Tai Zen:  You’re still an attorney. You’re just not with Chadbourne anymore.

Attorney Greg Rigano: Correct. I’m pursuing blockchain

Tai Zen: The way that I met Greg was I went to a cryptocurrency conference in New York. At the same time, we were looking for an attorney investing in cryptocurrencies, knowing about cryptocurrency and understanding the law, so they can help our company navigate the legal waters here.

We found out that he was an attorney who focuses specifically on Bitcoins, blockchains, and cryptocurrencies. Plus, he has followed our channel and he actually invested in cryptocurrencies, which would make it much easier to talk to him about our business and stuff.

We have actually retained Greg to help us with our business legal matters. Therefore, we invited him to come on here to help us explain this SEC report.

Before we go into the report Greg, can you explain to the audience here, in case they live outside the US, what is the SEC in the first place? Why are they so important in the cryptocurrency world?

Attorney Greg Rigano: Sure. So the SEC in the United States Securities and Exchange Commission, which primarily responsible for enforcing federal securities laws, proposing securities regulations. Basically, Federal Securities is under the purview of the SEC.

Tai Zen: When they released this report about the DAO token sale, what makes this so important? Is it because it’s the first time that they released this?

Attorney Greg Rigano: What government will do in the United States for those of you outside of the country is as state government or federal government, they’ll issue guidance on an issue that is sometimes hot, sometimes not.

However, the purpose is to give the outsiders some sort of guidance as to how to navigate any sort of legal issue and how to be in compliance.

The DAO case is $150 million, so that brought some attention to what was going on. It was hot at the time. Plus, token sales are raising hundreds of millions of USD. This is was just kind of screaming for someone to say and ask for guidance on what’s happening here.

Tai Zen: Since we’re talking about the Securities and Exchange Commission, and this DAO report here, which is about whether or not the DAO tokens that were security, could you briefly describe to the audience and explain to the audience what makes something security?

If I give you baseball cards or comic books, is that security?

I know that stocks and bonds are securities. Could you explain to the audience in case someone’s outside the US or someone’s not familiar with Wall Street, what makes it security?

Attorney Greg Rigano: In the crypto world now, everybody has now heard of this test called the Howey test. That is case law that was outlined to determine what is a security and what is not a security.

However, this case law is not black and white. It’s up for interpretation and depending on who’s interpreting it.

On a fundamental level, security can be a number of different types of financial vehicles.

In this case, we’ll call it an investment contract, which is an investment of money in a common enterprise with the expectation of profits and such profits are derived from the efforts of others. That is the basic framework.

Tai Zen: Cause I sent out the link of the report to everyone and it is written in legal format, could you just briefly describe to everyone what the components of it are.

Attorney Greg Rigano: Why don’t we just put this to the people?

If you want to google that, that’s the report that we’re talking about.

It came out on July 25th, 2017 entitled report of Investigation Pursuant to Section 21a of the Securities and Exchange Act of 1934 the DAO.

This report is guidance from the SEC about whether or not the DAO, the Decentralized Autonomous Organization, which built on top of Ethereum was security. In fact, it was deemed so by the SEC.

I highly recommend everybody in this space or who are considering becoming involved with blockchain and crypto actually reads this report. It’s a very well written legal document. It’s likely going to be cited in the future.

When you look at this report, what you really want to do is read it through one time without doing much highlighting and kind of digesting it. Then you read it through a second time and see where you have questions.

If you do have questions and you’re potentially going to engage in some sort of commercial enterprise, even if it’s just trading, you should probably consult a lawyer to know whether or not what you’re investing in is a security or not and regulations that may be on the periphery of that.

Tai Zen: I have the report on a different screen here. It starts out with an introduction and a summary. It explains what the DAO is. Basically, they’re saying the facts and the background.

Let me just summarize the DAO attack in case someone’s new to cryptocurrencies and missed the DAO fiasco that happened last year.

The DAO stands for a Decentralized Autonomous Organization. It was supposed to be a virtual corporation that exists only on the blockchain. It was supposed to be handling governance.

What it did was it was supposed to collect and raise money into one pool. Then, the DAO was going to make a decision and people can help them make decisions on where it takes that money and put it into different investments.

The profit from those investments will be distributed back out to the people that hold the DAO tokens. They raised about $150 million in Ethereums.

Everyone who participated in it would have DAO tokens and they could use those tokens to make votes on what businesses, projects or cryptocurrencies to invest in.

Before they were able to invest into anything, they were hacked and a bunch of money was stolen from them.

That forced the Ethereum foundation to hard fork the blockchain and return the $150 million back to all the original DAO investors or the people that participated in the DAO. That happened to be from April 30th to May 28th of 2016.

Nearly over a year later, the SEC finally released this report on their investigation of it.

From my understanding, they have announced that they are not moving forward with any criminal. What do you call those indictments? Is that correct?

Attorney Greg Rigano: I’m not a criminal lawyer.

Right. It doesn’t look like they’re pursuing enforcement action against the DAO. That can be for a number of reasons.

What’s most important is we know that the SEC is watching even though there’s a certain framework that has always been in place and the Howey tests.

Now, they’re applying it in crypto, so it isn’t completely unregulated as people previously believed. Therefore, you should absolutely be aware that this is happening.

Tai Zen: As people are reading through this SEC DAO report, what do they need to extract from it?

Attorney Greg Rigano: Great question. What the DAO really turned on or what the SEC really looked at was not the code. Throughout this SEC report, SEC again did not interpret any of the code. The smart contract code was not utilized. It was all about the marketing materials.

In the marketing materials, it was said that purchasing the DAO was like buying shares in a company and getting the right to dividends. There were no limitations on the sophistication of the investor. Stock, who created the DAO, promoted secondary market trading.

Those were just things kind of in the marketing materials, which is saying this is a for-profit entity. That would satisfy items 1,2, 3 of the Howey tests, which states “investment of money in a common enterprise and the expectation of profits”.

SEC analyzed the facts and went through items 1 to 4 of the Howey test. For items 1, 2, 3, they only dedicated a paragraph respectively. However, for item 4 pronged for derived from the efforts of others, they dedicated 4 pages of legal analysis to that.

If you have the report in front of you, you could turn to page 12, Section 3v4 Derived from the managerial efforts of others. Here is where the real analysis starts.

Tai Zen: Basically, what you’re saying is the Howey test has 4 questions that the court has asked to determine if a product or whatever it is being issued is security or not.

Basically, the report indicates that the first 3 prongs of the test of the Howey test have been satisfied. You’re saying that they only spend a brief moment on that because that was easy to satisfy.

Attorney Greg Rigano: Right. It actually says that all of them were satisfied.

Tai Zen: Then the 4th one is derived from the manager efforts of others. That’s the one you’re saying that they spent a lot of time on.

Attorney Greg Rigano: Right. Because that’s an investment of money. This is a side thing that we’ll talk about a little later on.

They considered Ethereum money. They did not say Ether was security. That’s an interesting thing that we’ll talk about a little later.

“There was an investment of money in a common enterprise”.

The DAO is clearly a common enterprise.

“Expectation of profits”.

It was specifically stated by the DAO that you are investing in this for an expectation of profit.

All those were satisfied.

The issue that token sales ICO is trying to structure around, at least that I’m seeing now, is derived from the managerial efforts of others, prong 4 of the Howey test.

What is governance? What are the voting rights? Can voting rights affect the organization? Because the personnel that launched it like the DAO or Slockit are really the ones governing the enterprise.

The SEC said that the DAO and Slockit were curators that were kind of enabling the voting to occur.

The report cited a youtube video with Vlad Zamfir, who is big time Ethereum developer. They use his words against the DAO saying that the curators and Slockit more or less have control over the proposals that the DAO token holders would vote on.

Basically, SEC came to the conclusion that it was Slockit and the curators enabled by slockit that had the ability to essentially whitelist certain proposals to allow DAO token holders to vote on.

That managerial ability from the DAO and slack it was really the foundation that SEC used to satisfy pronged 4 of the Howey test.

Tai Zen: Basically, when they’re issuing these DAO tokens, the way that slockit issue the DAO tokens is considered security inside the US.

To help the people to understand, why is that such a big issue if it’s security, Greg?

Attorney Greg Rigano: Sure.

We’ve all heard of the New York Stock Exchange or NASDAQ and the term initial public offering at this point. If you satisfy the Howey test, you’re security now.

According to various federal laws that I don’t want to bore you with, if you satisfy the Howey test that you’re Security, you fall under the jurisdiction of the SEC and you need to register that security with the SEC.

You will have more or less there. If you’re not committing fraud, this investment opportunity has kind of been blessed by the SEC to proceed, to engage in capital formation and to make money from the public.

However, what’s especially interesting in this situation is there’s a difference between accredited and unaccredited investors.

There are other details in there, but just for the sake of ease, accredited investors means people with a net worth of $1 million or more, whereas unaccredited investors are people with a net worth of $1 million or less.

In the crypto space, tokens, coins which are operated on Bittrex, Poloniex Coinbase, prior to this decision, it was kind of fast and loose. People issuing these tokens were allowing unaccredited investors to invest.

Tai Zen: I’m going to jump in real quick so that the audience understands.

What is considered an accredited investor inside of the US?

This is something that’s been a baffle people outside the US because some countries like Vietnam, China or so don’t have this concept.

Attorney Greg Rigano: An accredited investor is someone with a net worth of $1 million or more, which is independent of their home value or someone who’s made approximately $200,000/ year for 2 years in a row.

Unaccredited investors are people that are not that.

Tai Zen: Basically, according to US law, if you don’t make $200,000 a year and you don’t have $1 million net worth that excludes your house, companies and businesses cannot offer securities to them. Is that correct?

Attorney Greg Rigano: No.

Like a venture capital deal, Slockit was essentially holding themselves out to be more or less a venture capital firm. An unaccredited investor is not allowed to invest in a venture capital firm unless that venture capital firm trades publicly on the NASDAQ or New York Stock Exchange.

When you trade Facebook stock, anyone could invest in that that has access to the capital markets, whether you’re accredited or an unaccredited, because now it’s publicly traded. It’s on the Nasdaq or New York Stock Exchange. It has gone through the registration process with the SEC.

Registering security with the SEC is not a small ordeal. There are plenty of law firms that charge $1,000 an hour that you use to register security.

Therefore, to invest in Facebook stock, anybody that has access to a Fidelity account can do it.

However, prior to facebook going public, there were multiple rounds of funding that an unaccredited investor could not get access to. The reason is they didn’t satisfy the $1 million thresholds or higher. Only accredited investors could get in there.

In this case, the DAO said we don’t care if they’re unaccredited or accredited investors. We’re not registered with the SEC. Then, everybody came on in. Now we know that it is secure. That’s where the issue.

Tai Zen: Just real quick, I want to welcome the honorable grandmaster legendary LeonFu.com. He is joining us while he’s driving. Say, Hello Leon.

Leon Fu: Hey guys, sorry I’m late. I had to get on the road here.

Tai Zen: Basically, Greg was just explaining why the DAO tokens are considered Security.

Now he is saying that since it’s considered security, they have to register with the SEC and they can only offer it to an accredited investor. They cannot offer it to the regular public.

Attorney Greg Rigano: if they did an IPO and wanted it to be traded on the NASDAQ, that was fine. However, the issue with that is something you don’t hear most people talk about.

What’s incredible to me about blockchain and crypto is it enables capital formation in a geo agnostic fashion.

Tai Zen: Geo agnostic means that people can raise money to build their business from anywhere in the world.

Attorney Greg Rigano: Here you go, Tai. You must have some experience in trading.

Tai Zen: Since Greg is an attorney, he has been careful and say things according to the law and everything. I’m not an attorney, so I’d like to bring it down to the street level.

You’re saying that they can raise money from anywhere from around the world.

Attorney Greg Rigano: Yeah. As long as they’re compliant with the jurisdictions in order to register with the SEC and do an IPO.

However, the problem with that is it caused significant legal fees and you have to pay investment to do an IPO.

When you see people hitting the bell on the Stock Exchange, they paid a significant sum to lawyers to register with the SEC. That causes a lot of issues for people that want to raise money because they have to have $1 million to spend on legal fees.

That’s why we see people going to tokens, but you have to make sure that what you’re doing is not a security.

The DAO could have done it like a security, but then when you do that, you’re potentially taking yourself out of crypto land and bringing yourself into fiat world, which historically has been limited by geography.

Let’s say your company has a few hundred million USD in revenue. You have an evaluation of like $1 billion or less market cap. If you’re going to do an IPO in the United States, you’re not likely to get investment from Asia, Eastern Europe, probably not even western Europe. Maybe you’ll get a little institutional money from the UK, not South America.

However, with crypto, you can get it from anywhere in the world.

Leon Fu: I got a question for you here.

Tai Zen: Hey Leon, you got to speak up.

Leon Fu: I’m speaking directly into my phone. I can’t speak any louder.

You said that the reason people don’t register as security is it costs a lot of money to pay the lawyers, register with the SEC and do all of that good stuff.

However, the lack of money is not a problem in crypto now. I mean all of these projects are raising more money than they could ever possibly need. At least, that’s the environment we’re in right now.

For example, the DAO raised to almost$200 million at one point. That is certainly enough money to pay enough lawyers to do everything legally.

However, the problem is they just want to issue it on the blockchain rather than on the NASDAQ or the New York Stock Exchange.

Attorney Greg Rigano: Right. I think this is where things are headed.

We’re going to see it in the next few days with file coin, which is doing it on a much greater scale.

I think that’s a very astute observation, Leon. I think they want to do it on the blockchain because that gives them access to planet earth as opposed to just the United States or the UK.

Leon Fu: Now the issue is you need $1 million to register security. Maybe you do that privately. You get money from a traditional VC or just from angels, then use that money to register the security with the SEC or with whatever jurisdiction.

Attorney Greg Rigano:  Leon, you’re cutting out a little bit.

Leon Fu: Yeah.

As I said, I don’t understand why when I go buy a stock on the NASDAQ or the New York Stock Exchange, I don’t have to be a credited investor, but if I want to invest in file coin, I need to be an accredited investor. What’s the difference there?

Attorney Greg Rigano: Don’t quote me on this, but I’m pretty sure they’re doing it under Reg D, which means that SEC’s regulation D. That means since they’re admitting it a security and only offering it to an accredited investors, under regulation D, you do not have to register that with the SEC.

Leon Fu: What about a stock that is traded on the market like Apple stock?

Attorney Greg Rigano: For Apple, they did all their rounds of private funding, regular VC rounds before, then they went public.

When you do your IPO, you have to register with the SEC. You have to do your registration statements, which, again, are this fat 100-to-200-page highly technical documents about the offering. This could take months or years.

Leon Fu:  Can we replicate that model with an ICO? Because they have enough money. I would say that last year or 2 years ago, there was not enough capital to cover that overhead.

Now, there are ICOs that are able to raise hundreds of millions USD, so obviously they can go do that. They have the resources to actually do that.

What I’m saying is there’s enough money now that you can go do all that legal work and still have enough money left over to do the project.

Attorney Greg Rigano: It depends how you raise it initially, but the other issue with having it as security is it’s no longer permissionless.

If you want to register an account at Fidelity and you’re from a small fishing village in Vietnam, Fidelity is going to have to do a KYC/AML process on you.

Who knows what that will result in with someone who was from a small fishing village?

Tai Zen: They will not let you register an account with them because I used to use several different brokers in the US and tried to talk to the brokers that helped me open up the accounts in America. The result was they wouldn’t let the people in Vietnam open up the accounts.

It’s not because the American brokerages do not want to accept money from Vietnam. The Vietnamese government has kept very strict capital controls on it to where they won’t let money come out of Vietnam and go into the American brokers.

Leon Fu: But that’s are 2 separate issues now. That’s a capital control issue.

Let’s say we wanted to do an ICO and it is a security. We registered with the SEC and now rather than taking Fiat, I just take Bitcoins or Ethers. Then, I raised my money that way and I issued them security over the blockchain.

Attorney Greg Rigano: Where is the security in this hypothetical world being traded?

Leon Fu: It can be traded anywhere. It’s peer to peer. I can trade it.

Let’s just say hypothetically I’m issuing security. It’s not my responsibility as the issuer to inform where it trades. I just give you the tokens on a blockchain. That’s how you trade it. Am I as an issue are responsible for how it’s traded.

Attorney Greg Rigano: That’s an amazing question.

Leon Fu:  Like Apple is not responsible for how Apple trades. That’s the NASDAQ or exchanges’ liability on how it trades. It is not with the issuer. Is that correct?

Attorney Greg Rigano: Well no because there are plenty of securities lawyers out there that just do plaintiffs work, meaning they’’ ll try to sue Apple every opportunity they can to do some sort of class action.

Let’s say there was too much leverage loud for on an exchange and it goes bust on Apple stock, Apple could potentially be liable in a situation like that.

Leon Fu: Apple has no jurisdiction or control over that exchange.

Attorney Greg Rigano: Think about it like this. Apple chose to go to the NASDAQ. Apple does not trade on the New York Stock Exchange. They could have gone to either one, but they chose the Nasdaq because it’s more like technology-based.

Leon Fu: That’s not exactly true because there are dozens of exchanges.

Tai Zen: Okay. I want to jump in real quick because I want to remain focused on the SEC DAO report here and how it affects traders and investors. I know Greg’s time is limited.

Leon Fu: Sure.

Tai Zen: We’re getting a lot of questions from the audience here. I’m going to mute you real quick Leon.

Attorney Greg Rigano: I think mute yourself, Tai.

I just want to address Leon point real quick. Leon is calling for a worldwide securities exchange on the blockchain.

I actually remember speaking with my law school professor about this like 6 or 7 years ago. He was like why didn’t t that exist.

I think it’s brilliant and it’s just a matter of time before we get there. However, what caused us to go down this pathway was a registration with the SEC and what that process is.

That’s not a small process, but Leon was saying it could be easier now to raise anywhere between $1 million to $5 million to pay your lawyers and bankers, then proceed with registration on the SEC to put that security on the blockchain and allow trading from there.

I guess my hesitation with that is blockchain is permissionless and securities are not permissionless. There’s KYC/AML to it.

These things like Bitcoins, Monero, Zcash are used to trade in the underworld and they don’t require a KYC process, which is opposite to buying Apple stock.

Can you really buy Apple stock peer-to-peer? Maybe, but most people do it by using Fidelity or a licensed brokerage. I don’t want to digress too much further, but if you have anything to respond to, please go ahead.

Tai Zen: As a trader and investors, there are 3 groups of people I see that are affected by this, which are the people issuing the crypto tokens, the people trading the crypto tokens, and the businesses involved in dealing with the crypto tokens.

Let’s just start with the people that are issuing the tokens. From your legal background, what type of legal would they need to look for or implement to make sure that the SEC doesn’t come down on them?

Attorney Greg Rigano: That’s an amazing question. This is kind of where we’re getting into potential legal advice.

I am nobody’s lawyer on the chatbox or anyone that watches this. This is a friendly conversation to discuss a very high-end financial technology. It’s a risky technology. It’s new. Things can happen, so again, this is not legal advice.

Firstly, if you’re planning to do a token sale, you want to get with a lawyer immediately. That should be the first thing you do.

It’s fine to have a lawyer as an outside counsel, but sometimes having a lawyer as an outside counsel requires you to spot the issues.

If you don’t spot an issue like the DAO and Slockit, it could potentially be a bad situation.

What you really don’t want to do when you’re starting any new business is you don’t want to be involved in litigation and you don’t want to start receiving enforcement letters or any sort of letters from the government. Instead, you want to be in compliance and on the up and up from the beginning.

What I highly recommend is you bring in in-house counsel that can spot all the issues for you.

If you’re only using outside counsel and you just slip up one time, market this the wrong way or use the wrong vocabulary, it can be serious issues for you.

The second part of it is that you can’t go around selling something as an investment, profits, dividends without expecting to register with the SEC.

That’s another major thing, but what I would kind of like to focus on here is pronged 4 of the Howey test and what the SEC said.

What value does your token bring and how is it governed? That’s what’s likely going to determine if it fits in the Howey test or not because it’s an investment of money from a common enterprise.

For example, EOS says that this token is nothing more or less.

Tai Zen:  I haven’t done a lot of research into it, but in my opinion, a lot of these crypto projects issuing these tokens are trying to skirt and avoid being labeled as a security.

Based on my super-duper amateur interpretation of what the SEC DAO report, it is saying that no matter what you call it or what you label it, if it performs like security, they are going to treat it as a security.

Attorney Greg Rigano: This was marketed as an investment with the expectation of profits and it’s a matter of where the profits coming were from.

Was it purely based on the DAO or was slockit running it? The SEC essentially said that there were curators, in one form or another, enabled by slockit and that slockit and these curators had control over the enterprise.

There were several interesting points that the SEC hits on. One is the decentralization of the DAO actually favored it being deemed a security.

The SEC said if you have all these parties all over the world that are now in this decentralized autonomous organization, it’s really difficult for them to get organized an effective decisions even though there are message boards and all that good stuff.

However, they use proof of slockit having to intervene to handle that poorly written code hack and say for slockit, where the money would be.

They use that to say slockit has control by using the curators. The curators were the ones that were kind of allowing proposals to be whitelisted so that DAO token holders could vote on them.

Then the other thing that was very interesting, which is going back to how decentralization favored it being security, is that the voters weren’t really organized.

Therefore, it will be very interested to see kind of how tokens are structured based on this.

Is it going to be the DAO that has full ability to proposals forward? What about the governance voting structure? Are you going to make it so that votes can be consolidated and easily enabled? Or are you going to make it not as easy to do? Is that for-profit or nonprofit entity?

The DAO was structured and marketed as a for-profit entity. A lot of people now are turning to not-for-profits in Switzerland, Singapore. I’m even seeing a few that are coming out of Grand Cayman now.

Tai Zen: You’re saying that for the people issuing the tokens, they need to have a counsel, an attorney or a lawyer look at all the trouble spots that they could potentially run into.

Attorney Greg Rigano: Yes. I honestly can’t stress this enough that there are outside counsels and in-house counsels. Outside counsel is great. Having outside counsel means you’ll find tremendous lawyers that have focused on very niches of certain parts of the law.

However, what’s really important before you go to outside counsel is you want to have someone in-house to spot issues to be compliant with the SEC.

The worst thing that could happen is if the DAO existed and it was trading now and all this good stuff, then this SEC decision comes down, now every exchange that’s involved with the DAO is probably going to have issues with liquidity and the price of the token will probably go down.

Therefore, you really want to be compliant from day one and not have to do it after you have issued.

Tai Zen: Okay. Now let’s talk about the other 2 groups of people that are involved in these cryptocurrency tokens. Let’s talk about traders and investors.

I know that you’ve mentioned multiple times that you’re not a lawyer. You’re a lawyer because we retain you, but you’re not the audience, the subscribers and the viewers’ lawyer.

From a trader and an investor’s perspective, how could the SEC report possibly affect the investors and the traders that are trading and investing in these tokens?

Attorney Greg Rigano: A lot of people are not going to like what I’m about to say right now.

I did not invest in the DAO. I always do thorough analysis as to whether or not something is security before getting involved with it.

In this report, it says if you enable non-security trading to occur, you have some sort of liability.

Now it’s a matter of whether the SEC is going to come after you. The SEC is a federal agency with limited funding.

Therefore, are they going after big whales, an enterprise that’s raising $150 million, or someone that’s trading a few thousand USD on an exchange? I don’t know.

However, you can’t enable something that’s a security. If you’re issuing it, you’re trading in it or you’re enabling it to be traded on your exchange, depending on certain levels of your involvement, it could trigger certain investigations and other penalties.

From what we’re seeing from this SEC report, they’re not taking action again Slockit.

I don’t think they said whether or not they’re going to take action against the exchanges or the individuals that bought in.

Again, we’re operating at the pinnacle of financial technology here. This is very high and stuff, so do your own research.

Tai Zen: From my perspective and my trading and investment strategies, I really hesitate on projects when it’s obvious that they are a Security and they’re not following the SEC guidelines.

The reason is I don’t want to put money into a project, which ends up getting hurt or gets under SEC investigation.

That is going to hurt the price and the value of the tokens that are related to that project.

I follow this the SEC report on crypto simply because I want to see what their guidelines are or to get a grasp of what their guidelines or, so I’ll know what projects to avoid.

Attorney Greg Rigano: Sure.

Tai Zen: Do you have anything to add to how this SEC DAO report affect those 2 constituents?

Leon Fu: Not at this time. I have a lot of thoughts, but not related to that particular issue.

As Greg said, I agree with everything. I think we’re operating in a lot of things that are not clear at the moment. We’ll just wait and follow the guidance as it comes out. This is what my strategy is.

Tai Zen: Let’s move on to the last group of people. How do you see it affecting the businesses, which is not the people that issue the tokens like the cryptocurrency projects, but like the media, education and training company or people that make the services around the tokens?

Attorney Greg Rigano: I just want to read this. It’s on page 16 of the report. It says those who participate in an unregistered offer and sale of securities not subject to a valid exemption are liable for violations of Section 5.

That depends on what kind of your businesses. Are you an exchange? Are you Poloniex? Are you listing DAO tokens?

Basically, the way you want to look at it is whether token issue dividends or not, and whether or not you are really doing anything to get those dividends. If so, it’s probably a security.

According to what the SEC wrote here in this report, if you’re an exchange, you probably don’t want to list that token cause you’re kind of enabling liquidity of an unregistered security. That’s definitely a no-no.

If you’re an education company, well now you’re just educating people on what’s going on. Okay, that’s security over there. S

I’ve been thinking about like a good example of what a token that’s a security would be.

One that immediately comes to mind and it’s it’s called token card, TKN. It raised $12 million less than 15 minutes or 30 minutes.

The way token card works is you have this debit card that you have your tokens on and there’s a swipe. Each swipe takes a fee. If you have the token card tokens, you get a pro-rata share of that fee.

Now that’s a security, so token card does not offer it in the US. However, it was listed on some exchanges after its initial coin offering or token sale to avoid the SEC. I’m not saying that’s going to avoid the SEC, but that’s what people are trying to do now.

If you’re an exchange enabling the unregistered sale of securities to potentially unaccredited investors, that’s pretty bad.

If you’ve done that for millions and millions of USD, that can give rise to both enforcement actions by the SEC.

One thing we haven’t seen play out in civil lawsuits. The litigation gets pushed further down the road because litigation always causes issues and is potentially a waste of resources.

However, we haven’t seen this played out in court yet, so we don’t know exactly what can happen.

Back to the point, if the exchange is listing unregistered security, that’s not good. If you’re educating people on it, how are you educating them on it? Are you educating them like this is a good investment here? Or are you doing it as a textbook-like token card which would fit under security?

However, there’s a bunch of utility token you could choose from. One that comes to mind immediately is something like basic attention token. I’m just going to comment on their legal situation.

They use the large Manhattan law firm to kind of structure their arrangement and what the value they were bringing was. That’s for specific utility in the advertising ecosystem. It doesn’t pay dividends. You could speculate on it.

Again, what bucket of this second pronged you fall under? Are you an exchange? Are you educating? Are you providing other sorts of services?

According to this SEC report, are you enabling liquidity and sale of unregistered securities to unaccredited investors?

The SEC wants to protect the orphans and widows. They don’t want people who need to make rent next month to invest in a highly volatile on the unregistered financial instrument.

We saw it when this decision came out. We saw certain tokens get delisted from certain exchanges.

I think it’s going to continue on this that way. This decision is actually very good for the health of the industry. It’s going to kind of funnel out the crap and the higher-level ones are going to start to become more apparent.

Tai Zen: Okay. All right. That’s all the questions I have at the moment.

We’ll give a few minutes from the audience to submit their questions in and I looked through it and relay them to you.

The first question is how you find out or determine if a token is a security or not.

Attorney Greg Rigano: Just read it and spend some time on it if you really are going to be part of the blockchain space long term.

If this decision scares you and you don’t want to be involved anymore, that’s fine.

This technology, to me, is revolutionary as we’re seeing.

Look at this decision and google the Howey test. You should focus on Section 3b for pages 12 through 15

Read this report, look at the Howey test and focus on the governance of the token, then compare it to this SEC report with a focus on Section 3b4. That’s what I would do

Tai Zen: This is another good question here from Siebert. She asked what if the token issuer crypto project goes outside the US.

In my personal opinion, if you’re dealing with people in the US, it still falls under SEC’s jurisdiction.

Some people think that leaving the country and doing it somewhere else keeps them outside of the jurisdiction of the SEC. Could you comment on that?

Attorney Greg Rigano: Sure. If you’re offering your financial instrument to people in the United States and you live in Spain, you come under the jurisdiction of the SEC purely based on you offering it to Americans.

For example, status.im causes problems for the virtual machine for a little bit. They didn’t offer it to Americans.

Now, are there ways around this shore? I’m not telling you to use a VPN, but that’s the next thing.

You maybe declare that you’re not using a VPN and we’re going to have some level of KYC involved with it there.

As long as you’re offering it to Americans, you come under their jurisdiction.

Another important thing is there are so much you could do with VPN to get around that, but a really good thing to do is to make sure you’re not selling to terrorists and you’re financing criminal activity.

There’s a certain list I want to put you on to if you’re planning on doing an ICO. This is a bare minimum. You should really do a lot more than this. Let me just pull it up for you.

Tai, you could go to the next question while I pull this up?

You want to make sure you’re not doing anything with anybody on the list of Office of Foreign Assets Control. Those are basically a blacklisted people that you don’t want to get involved with and that will cause enforcement action.

Tai Zen: I know you’re an attorney for us, but not for the audience so you cannot make recommendations to them.

However, I would say this is that if you are a business that has a longterm outlook like we do as a media company in crypto and want to navigate the legal waters correctly, you should get a competent lawyer or counsel.

There’s so much potential business in this new industry and that does not make sense to take the risk of the legal risks of getting in trouble or not following these laws.

Somebody asks whether Bitcoin is a registered security. The SEC acknowledged that bitcoin was not a Security. I read that somewhere in the past.

Attorney Greg Rigano: Well, now what we have Bitcoin cash and Bitcoin core and who knows what they’re going to do. It could become security in the future based on how that plays out.

Currently, I don’t think it’s security. That’s based on kind of what the SEC put out there. However, that doesn’t mean it can’t be one, especially with the voting processes and governance.

Tai Zen: “Did you see anywhere in the report if they stated that Ethereum is a Security. I know they said that the DAO token is a security. What about the Ethereum token that was used to purchase or transact the DAO tokens”.

Attorney Greg Rigano: I actually went to an event in New York put on by another big law firm in Manhattan.

We had similar opinions that this decision essentially says the Ethereum is money and it is likely not a security, which is really interesting.

Tai Zen: This is where Leon and I find that’s very confusing.

The IRS, a governing body, says that Bitcoin is a property. Then, Simpson or the CFTC deems a Bitcoin as a commodity. Now, the SEC is saying that it’s money, but not a currency.

You’ve got these different government bodies all giving it a different label or an interpretation, which causes a lot of the confusion for the crypto market.

Attorney Greg Rigano: Right. For FinCEN, it’s a virtual currency. For CFTC, it could potentially be a commodity. For the SEC, it’s unlikely that Bitcoin would be classified as a security.

There’s kind of like a legal minefield that you want to operate through because this technology is so powerful and it’s a peer-to-peer immediate settlement of transactions without a middleman.

It kind of ahead of what the government could potentially clamp down on right now. We’ll see where it’s going to go.

One thing I’m really interested to see is how litigation’s going to happen because now we know the DAO is security. That means other things are the securities.

Therefore, you’re potentially selling to widows and orphans. I don’t know. Are we going to have legal opinions that involve code?

This is going to get really weird guys. This is not going to be your everyday legal scenario. This is going to get strange, very high technology and on that.

What we’re seeing now with the file coin token sale is they’re using the SAFT standing for Simple Agreement for Future Tokens.

They’re starting it as a security to then become a token later on after it’s built. That’s kind of the newest and that’s based on the safe, which is for VC equity investments.

However, some people are arguing that it’s only for accredited investors and that could hurt it with respect to decentralization because it really limits who you can offer it to.

So we’ll see what’s going to happen, but the SAFT is a good starting point for kind of bringing this under control.

Tai Zen: Okay. That’s all the questions I have. I just want to say thanks for coming on our show to explain this. You know the legal side is outside of my expertise and outside of LeonFu.com expertise.

Do you have any other comments, Leon?

Leon Fu: Nope. That’s it for me.

Attorney Greg Rigano: One more thing on the legal. Now, we have this security decision. What I would really like to see from the SEC guidance on utility tokens is whether a utility token is a security like basic attention token.

Then, what about a utility token for a project that has not yet been built? Is that a security or is it not? Based on the governance model, it is dependent on how it’s structured.

Beyond the lookout for those types of things.

Leon Fu: Yeah, thanks. I think that’s interesting, Greg.

Kickstarter has been around for a long time and that is a product. Typically, you’re putting money down for something that didn’t exist yet. That’s obviously not a security because it’s a product that you’re buying.

Could it be argued that these are software products that you’re buying rather than a security? I’d like to see the government give guidance on that like the utility token.

Tai Zen: Let me ask you this before we wrap it up here

If someone who is blockchain or cryptocurrency-based business watch this and want to reach out to you or contact you for legal counsel since there a few attorneys out there focusing specifically on blockchain and cryptocurrency-based businesses, what would be the best way for them to contact you?

Attorney Greg Rigano: Yeah, email would be the best way and you can get that email. I think we’ll either put it on the video or you can email Tai and Leon and they could get it to you.

I’m very happy to have a phone call with you to discuss your issues, so don’t hesitate to reach out.

Tai Zen: And you are based out of New York City?

Attorney Greg Rigano: Correct. Undisclosed location for now. Don’t haggle.

Tai Zen: Okay. If you guys these types of the legal professionals’ video, give us a thumbs up on it so that we’ll know to continue bringing Greg to come back.

If you are not interested in it, give us a thumbs down, so we’ll know not to waste our time and Greg’s one.

If you guys have friends, family or colleagues that are interested in cryptocurrency investing or just learn more about it, share this channel with them and follow @Leoncfu and @Hey Tai Zen.

You can also subscribe to our channel at www.cryptocurrency.market/newsletter.

I will get the contact information from Greg and leave it in the description so that you guys can reach out to him. Please do not contact me and Leon about legal stuff or tax stuff.

Thanks for watching this video. Thanks for coming on, Leon. Thanks for coming on, Greg. This will conclude this live broadcast.

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One Response

  1. I know you said not to contact you with tax questions, but I think it would be enormously beneficial if you did a video about tax liability with a tax expert before the end of the year. A lot of us have made significant amounts of money this year in crypto. Knowing how to pay tax on that profit turned to fiat in the USA would benefit a lot of your subscribers.

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